Monetary fund approves $7.6 bln loan to Pakistan

The International Monetary Fund approved a $7.6 billion loan for Pakistan on Tuesday to prevent it from defaulting on its debt and to help stabilize its economy. The loan, under discussion for more than a month, at first met strong resistance from the Pakistani government, which sought money on more generous terms from other countries. But Pakistan's major allies " the United States, China and Saudi Arabia " insisted that it accept the loan and the IMF conditions before they offered assistance. Those donors, worried about the crumbling economy and the escalating instability from Taliban insurgents, have declined pleas by Pakistan's senior politicians, including President Asif Ali Zardari, for quick infusions of cash with no strings attached. The acceptance of the IMF loan will raise the confidence of foreign and domestic investors, and the major donors are now expected to be reasonably generous, Pakistani economists said. As a sign of the concern about the poor state of the economy at a time of increasing pressure from Taliban militants, the leader of United States Central Command, Gen. David H. Petraeus, met with officials at the recent annual meeting of the IMF in Washington. Pakistan would get immediate access to about $3.1 billion, and the rest would be released based on quarterly reviews, the fund said in a statement. Explaining the need for the loan, Takatoshi Kato, the deputy managing director and acting chairman of the board that gave the formal approval, said, "The Pakistani economy was buffeted by large shocks during fiscal year 2007-08, including adverse security developments, higher oil and food import prices, and the global financial turmoil." Mr. Kato said the budget deficit had ballooned because the government had delayed passing higher prices to domestic consumers. He said the central bank's financing of the deficit increased inflation and precipitously reduced hard currency reserves. Reserves held by the central bank declined to $3.4 billion in the week ending Nov. 15, a 75 percent drop in 12 months, and barely enough to pay for one month of imports. The fund said Tuesday that it expected Pakistan's economic growth to slow to 3.4 percent in the current fiscal year, which began July 1, from 5.8 percent the previous year. The fund said that it expected the budget deficit to drop to 4.2 percent of gross domestic product in the current fiscal year, from 7.4 percent the previous year. "The reduction will be achieved primarily by phasing out energy subsidies, better prioritizing development spending, and implementing tax policy and tax administration reforms," Mr. Kato said. The State Bank of Pakistan raised its benchmark interest rate to 15 percent from 13 percent this month, and would "further tighten monetary policy as needed," the fund said. Inflation has soared in the past few months to 25 percent, leaving low income earners and the jobless struggling to buy staples. The IMF conditions include a demand that the government increase tax rates, among the world's lowest. The fund wants an increase in agriculture taxes " a move that members of Parliament, many of them landowners, have opposed for decades.